News
Podcast: High Yields and Low Risk with Dave Breazzano
Podcast Highlights
Dave Breazzano, Head of Team and Portfolio Manager, recently sat down with Ted Seides of Capital Allocators for a conversation on the history of the high yield bond market, changing interest rates, private credit, and Polen’s strategy to take advantage of myths in the market.
Highlights:
- Dave’s involvement in the history of the high yield market, including the founding of his firm in 1996.
- Polen’s implementation of its high yield investment strategy and how it takes advantage of myths in the market
- Dave’s thoughts on the changing interest rate environment, private credit, and opportunities and risks going forward.
Definitions
Par: Par value is the nominal or face value of a bond or loan as stated by the issuer and represents the amount that will be returned to the debt holder at maturity.
Credit Rating: A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO), such as Moody’s, S&P and Fitch, which evaluates the credit worthiness of an issuer with respect to debt obligations. Credit Ratings are measured using a scale that typically ranges from AAA (highest) to D (lowest) and are subject to change without notice.
High Yield Bond/Junk Bond: Junk bonds, also known as high yield bonds, are fixed income securities that carry a credit rating below investment grade, typically rated BB or lower by Standard & Poor’s (S&P) or Ba or lower by Moody’s. These bonds are considered higher risk, as the issuing companies or entities are more likely to default on their debt obligations.
Yield Premium: The yield premium, also known as the risk premium, refers to the additional yield an investor earns from a fixed income security over a comparable risk-free rate, such as U.S. Treasury bonds. The premium compensates investors for the increased risk associated with the security.
High Yield Index: A high yield index tracks the performance of high-yield debt issued by corporations.
Index: The volatility and other material characteristics of the indices referenced may be materially different from the performance achieved by an individual investor. In addition, an investor's holdings may be materially different from those within the index. Indices are unmanaged and one cannot invest directly in an index. The performance of an index does not reflect any transaction costs, management fees, or taxes.
Coupon: In the context of fixed income securities, a coupon refers to the periodic interest payment made to the bond or loan holders during its life. These payments are typically made semi-annually, annually, or on another specified schedule, and are based on the coupon rate, which is a percentage of the debt's par value.
Call Premium: Call premium is the dollar amount over the par value of a callable debt security that is given to holders when the security is redeemed early by the issuer.
Yield: Yield is defined as an income-only return on investment (it excludes capital gains) calculated by taking dividends, coupons, or net income and dividing them by the value of the investment, expressed as an annual percentage.
CapEx: Capital Expenditure (CapEx) refers to the funds that a company uses to acquire, upgrade, and maintain physical assets such as property, buildings, industrial plants, technology, or equipment. These expenditures are considered long-term investments that are essential for the company's growth and operations.
Private Equity: Private equity (PE) refers to investment funds, typically structured as limited partnerships, that invest in privately held companies or engage in buyouts of public companies, resulting in their delisting from public stock exchanges. Private equity investments are characterized by their illiquid nature, long-term investment horizon, and active management approach.
Free Cash Flow: Free Cash Flow (FCF) is a measure of a company's financial performance that shows the amount of cash generated by the company after accounting for capital expenditures (CapEx) necessary to maintain or expand its asset base. FCF is a key indicator of a company's ability to generate additional profits, pay dividends, reduce debt, or fund new projects.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization.
Recovery Rate: Recovery rate is the percentage of a loan that can be recovered when a borrower defaults. It can also be defined as the value of a security after it has emerged from bankruptcy or default
CLO: Collateralized Loan Obligations (CLOs) a structured security backed by a pool of loans. It uses leverage and is usually tiered with ratings ranging from AAA to equity.
Floating Rate: A floating rate, also known as a variable rate or adjustable rate, refers to an interest rate that can change over time based on the fluctuations of a benchmark or reference interest rate. This contrasts with a fixed rate, which remains constant throughout the life of the financial instrument.
SOFR: The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans. SOFR is based on transactions in the Treasury repurchase market and is based on data from observable transactions rather than estimated future borrowing rates.
Syndicated Loans: Syndicated loans are large loans provided to a borrower by a group of lenders (a syndicate), rather than a single lender. This arrangement distributes the risk and financing among multiple financial institutions, making it possible to provide larger sums of capital than one lender might be willing or able to extend on its own.
Private Credit: Private credit refers to non-bank lending and debt financing provided by private entities, including private equity firms, institutional investors, and specialized private credit funds.
Disclosures
This information has been prepared by Polen Capital without taking into account individual objectives, financial situations or needs. As such, it is for informational purposes only and is not to be relied on as, legal, tax, business, investment, accounting, or any other advice. Recipients should seek their own independent financial advice. Investing involves inherent risks, and any particular investment is not suitable for all investors; there is always a risk of losing part or all of your invested capital.
No statement herein should be interpreted as an offer to sell or the solicitation of an offer to buy any security (including, but not limited to, any investment vehicle or separate account managed by Polen Capital). This information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Unless otherwise stated, any statements and/or information contained herein is as of the date represented above, and the receipt of this information at any time thereafter will not create any implication that the information and/or statements are made as of any subsequent date. Certain information contained herein is derived from third parties beyond Polen Capital's control or verification and involves significant elements of subjective judgment and analysis. While efforts have been made to ensure the quality and reliability of the information herein, there may be limitations, inaccuracies, or new developments that could impact the accuracy of such information. Therefore, the information contained herein is not guaranteed to be accurate or timely and does not claim to be complete. Polen Capital reserves the right to supplement or amend this content at any time but has no obligation to provide the recipient with any supplemental, amended, replacement or additional information.
Any statements made by Polen Capital regarding future events or expectations are forward-looking statements and are based on current assumptions and expectations. Such statements involve inherent risks and uncertainties and are not a reliable indicator of future performance. Actual results may differ materially from those expressed or implied.
There is no assurance that any securities discussed herein are currently held in a Polen Capital portfolio nor that they are representative of the entire portfolio in which they are or were held. It should not be assumed that any transactions related to the securities discussed herein were (or will prove to be) profitable or that any future transactions will equal the investment performance of the securities discussed herein.
References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.
Past performance is not indicative of future results.
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